Home' Trinidad and Tobago Guardian : January 7th 2016 Contents JANUARY 7 • 2016 www.guardian.co.tt BUSINESS GUARDIAN
REGIONAL | BG19
At the start of 2016, Brazil
should be in an exuberant
mood. Rio de Janeiro is to
host South America s first
Olympic games in August,
giving Brazilians a chance
to embark on what they do best: throw a
really spectacular party. Instead Brazil faces
political and economic disaster.
On December 16 Fitch became the second
of the three big credit-rating agencies to
downgrade Brazil s debt to junk status. Days
later Finance Minister Joaquim Levy, appoint-
ed by President Dilma Rousseff to stabilise
the public finances, quit in despair after less
than a year on the job.
Brazil s economy is predicted to shrink by
between 2.5 per cent and 3.0 per cent in
2016, not much less than it did in 2015. Even
oil-rich, sanction-racked Russia stands to do
At the same time Brazil s governing coalition
has been discredited by a gargantuan bribery
scandal surrounding Petrobras, a state-con-
trolled oil company. Rousseff, accused of hid-
ing the size of the budget deficit, faces
impeachment proceedings in Congress.
As the B in "BRICS," Brazil is supposed to
be in the vanguard of fast-growing emerging
Instead it faces political dysfunction and
perhaps a return to rampant inflation. Only
hard choices can put Brazil back on course.
Rousseff does not seem to have the stomach
Brazil s suffering, like that of other emerging
economies, stems partly from the fall in global
commodity prices, but Rousseff and her left-
wing Workers Party (PT) have made a bad
situation much worse.
During her first term, between 2011 and
2014, she spent extravagantly and unwisely
on higher pensions and unproductive tax
breaks for favoured industries. The fiscal
deficit swelled from 2.0 per cent of GDP in
2010 to 10 per cent in 2015.
Brazil s crisis managers do not have the
luxury of waiting for better times to begin
reform. At 70 per cent of GDP, public debt
is worryingly large for a middle-income coun-
try and rising fast. Because of high interest
rates, the cost of servicing it is a crushing
7.0 per cent of GDP.
The Central Bank cannot easily use mon-
etary policy to fight inflation, currently 10.5
per cent, because higher rates risk destabilising
the public finances even more by adding to
the interest bill. Brazil therefore has little
choice but to raise taxes and cut spending.
Levy made a game attempt to renovate the
building while putting out the fire. He
trimmed discretionary spending by a record
US$18 billion in 2015 and tightened eligibility
for unemployment insurance. It was not
enough. The recession dragged down tax rev-
enues. Rousseff gave her finance minister
only lukewarm support, and the PT was hos-
tile towards him. The opposition, intent on
ousting the president, was in no mood to
Although he was a senior treasury official
during Rousseff s disastrous first term, Nelson
Barbosa may be able to accomplish more as
finance minister. He has political support
within the PT. He also has bargaining power,
because Rousseff cannot afford to lose another
finance minister. One early test will be
whether Barbosa persuades a recalcitrant
Congress to reinstate an unpopular finan-
A central target should be pensions. The
minimum benefit is the same as the minimum
wage, which has risen by nearly 90 per cent
in real terms during the past decade. Women
typically retire when they are 50 and men
stop work at 55, nearly a decade earlier than
the average in the Organisation for Economic
and Cultural Development, a club of mostly
rich countries. Brazil s government pays
almost 12 per cent of its GDP to retirees, a
bigger share than older, richer Japan.
If Brazil is to fulfil its promise, much, much
more is needed. A typical manufacturing
company spends 2,600 hours a year com-
plying with the country s ungainly tax code,
while the Latin American average is 356.
Labour laws modeled on those of Mussolini
make it expensive for companies to fire even
Brazil has shielded its companies from
international competition. That is one reason
why, among 41 countries whose performance
was measured by the OECD, its manufac-
turing productivity is the fourth-lowest.
To reform work and pensions, Rousseff
must face up to problems that have been
decades in the making.
Some 90 per cent of public spending is
protected from cuts, partly by the constitution
which, in 1988, celebrated the end of military
rule by enshrining generous job protection
and state benefits. Because it is so hard to
reform, Brazil s public sector rivals European
welfare states for size but emerging ones for
inefficiency. Long a drain on economic vitality,
Brazil s overbearing state is now a chief cause
of the fiscal crisis.
Overcoming such deep-rooted practices
would be hard for any government. In Brazil
it is made all the harder by a dysfunctional
political system which favors party fragmen-
tation and vote-buying and attracts political
mercenaries who have little commitment
either to party or to programme.
The threshold for a party to enter the lower
house of Congress is low: Today 28 are rep-
resented, adding to the legislative gridlock.
Congressmen represent entire states, some
as populous as neighbouring Latin American
countries, which makes campaigning ruinous-
ly expensive---one reason why politicians
skimmed off huge amounts of money from
It is therefore hard, despite Barbosa s
advantages, to feel optimistic about the
prospects for deep reform. Voters hold politi-
cians in contempt.
The opposition is bent on impeaching
Rousseff, a misguided battle that could dom-
inate the political agenda for months. The
PT has no appetite for austerity. Achieving
the three-fifths support in both houses of
Congress needed for constitutional reforms
will be a tall order.
What if Rousseff fails to bring about
change? Most of Brazil s borrowing is in local
currency, which makes default unlikely.
Instead the country may end up inflating
away its debts. Brazil s achievement has been
to lift tens of millions of people out of rags-
and-flip-flops poverty. Recession will halt
that, or even begin to reverse it.
The hope is that Brazil, which has achieved
hard-won economic and democratic stability,
does not once again lapse into chronic mis-
management and turmoil.
@2016 The Economist Newspaper Ltd.
Distributed by the New York Times Syn-
Panama s expansion of its century-
old canal, which has suffered costly
overruns and major delays, is now to
be complete "around the month of
May," President Juan Carlos Varela said
The leader, speaking in an address
to the nation, also urged the Spanish-
led consortium behind the project to
leave legal disputes to the "competent
authorities" and focus on completing
its work on the waterway.
The appeal came after a Dispute
Adjudication Board hearing a budget
overrun row ordered the state s Panama
Canal Authority to pay the consortium
US$17 million for extra labour costs
and for a strike called by workers.
"With respect, I am calling on the
contractors for the expansion project
to hold dialogue with the Panama Canal
Authority, to allow work to be com-
pleted, to leave legal disputes in the
hands of the competent authorities and
to avoid mediatized differences that in
no way help the image of the contrac-
tors, the Canal Authority and the
Republic of Panama," Varela said.
The consortium, Grupo Unidos por
el Canal de Panama, started the expan-
sion work on the canal in 2007. The
project is well behind schedule.
The extensions were originally meant
to have been completed in October 2014
but were then pushed back to an April
Varela s announcement indicated that
that may have slipped again, to May
this year. The work on the century-old
canal aims to triple its capacity.
The cost of the work was projected
at US$5.3 billion, but that has been
Varela also said it was "imperative"
to start a study on developing a river
basin to guarantee water supplies for
human use and for the functioning of
The expansion work on the century-old Panama Canal was due to be completed in October 2014 but has now
been pushed back to a May 2016 deadline.
Panama canal expansion to be
complete around May: president
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